If we want to clean up the financial services world, we're going to have to change our tactics. The more I look at our political system, the less likely it seems Congress would ever vote to rein in Wall Street's predatory behaviors. Follow my logic: Brokerage firms are enormously profitable because they're constantly figuring out clever ways to siphon money out of the pockets of their customers. The people most likely to recognize these shell games are mainstream financial planners who offer an honest service at an honest price -who know that, if they were ever to receive a $5 million bonus check at the end of the year, it would mean that their clients had gotten shafted along the way.
If our elected representatives suddenly got together to stop Wall Street's money-siphoning machine, it would cut off the flow of lobbying money into their re-election coffers and there would be nothing to replace it. Honest financial planners don't rake in enough that they can collectively or individually buy votes in Congress out of petty cash. At the same time, consumers don't know how to ask for protection from the brokerage money machine.
Our regulators are bought and paid for by a mechanism that's even less subtle. Enforcement officials at FINRA and the SEC are well aware that, if they play their cards right, they'll be able to step off the government's payroll someday into a cushy job with a brokerage firm that can pay enormous bonuses. Alternatively, they could move to a law firm that rakes in enormous retainers representing the brokerage community. Too few choose to blow up that cozy future by actually prosecuting predatory behavior.
If the SEC were put in charge of catching and prosecuting robbers and thieves, they would routinely make them pay fines amounting to about half of what they stole, require them to sign documents neither confirming nor denying guilt and extract from them a stern promise not to do it again. If FINRA were given the same task, whenever it caught a robber or thief it would require them to propose better regulations that they might be less inclined to ignore.
A GLOBAL STANDARD
The financial services world cannot possibly be alone in dealing with this ugly dynamic. I suspect, based purely on the experience of our fiduciary debate, that there are countless similar business ecosystems in Washington in which a company or industry effectively buys a license to steal, pollute, exploit or otherwise rake in ill-gotten gains in return for providing a percentage of the loot to the re-election campaigns of our political candidates.
I would bet all the money in my pocket that those industries have the same policy of offering lucrative future jobs to the regulators supposed to be keeping them in check. Everybody in that nasty food chain is acting with perfect rationality to create a system that I'd describe as obscene and destructive.
What we need is something more than a fiduciary standard for those who hold themselves out as providers of investment advice. We need a global fiduciary standard that requires our elected officials, regulators and corporations to look out for the best interests of the public at large. That may be the only way to effectively protect our consumer population and future generations who otherwise have no lobbying organizations looking out for their interests in Washington.
How would this work? When an agency like the SEC produces an analysis of something like (to take a not-totally-random example) how to implement Dodd-Frank, it would be forbidden from spending at least a third of the document worrying about the consequences to the brokerage firm business model. It would focus purely on what's best for the customer according to its fiduciary mandate.
When Congress gathers to figure out how to create consumer protections or legal remedies, it would be required to avoid the blatant conflict of taking money from lobbyists. The practice of moving to lobbying or cushy corporate positions from government work would be banned. Companies, meanwhile, would be required to look out for their customers - which might eliminate the entire tobacco and soft drink industries.
I know there's a chance that, if you've read this far, you started laughing out loud somewhere in the last paragraph. That is exactly the point. We are so far from living in a fiduciary world that, when you start to talk about it, the description sounds like a fairy tale. Yet we somehow believe that we can impose this standard on our own corner of the economic world.
So what do we do - give up hope? For starters, I think we should recognize that the challenge of imposing a fiduciary standard anywhere is much bigger than we have allowed ourselves to realize.
We're going to have to pursue tactics far more aggressive than explaining to the SEC chief what she already knows: that those multimillion-dollar bonuses are clear evidence the public is getting cheated. We'll have to move beyond earnest conversations with elected representatives, telling them financial advice should only be available from people who mean well and only do nice things. Our only hope is to get the general public boiling mad and turn the anger into a teaching opportunity.
In stage one, we simply point out all the conflicts the brokerage industry makes visible. If we can't get investors riled up over a fiduciary standard, at least we can get them wondering why the brokerage industry so effectively evades being held to it.
Every brokerage disclaimer is a terrific marketing opportunity for the RIA firm down the street. Let them continue to follow the "disclosure" model; the weaselly-er, the better, as far as we're concerned. Then we can point to the clever way this distinction between fiduciary and sales agent has been obscured, and explain why, and have a good laugh with prospects and clients, sharing that satisfaction when both parties are smart enough to see through a clever ruse.
Stage two would be more dramatic. Left to its own devices, the whole brokerage business model emphasizes short-term bonuses over long-term reputation and financial health. That, we all know, is the most favorable recipe possible for yet another ugly, reputation-destroying implosion.
We, as a profession, and especially our lobbyists, should predict loudly and clearly that another Wall Street-induced catastrophe is the inevitable result of letting them act in their own self-interest once again. The next time that happens, we can point to our prediction and tell a wounded investing public that the same thing is going to happen over and over and over again unless something is done about the brokerage business model. And we can tell them they will probably be living through the same trauma 10 or fewer years down the road.
EXPOSE THE CORRUPTION
Eventually -maybe not after the next catastrophe or the one after that, but eventually -the public will get fed up with the cycle of traders, brokers, executives and elected representatives gorging on the money that comes out of our pockets, and with the cycles of economic disaster that decimate our portfolios and bailouts that come out of our tax dollars. They may demand a fiduciary standard in our small corner of the economic landscape, and then we can talk about the benefits of applying this standard more broadly. We may not win that battle the first time around either, but it will be interesting to hear the arguments against working for the public's benefit.
If our system is corrupt, then exposing the consequences of that corruption may be the only way to get people to ask for reforms -to raise, across the political and economic landscape, a clamor of voices loud enough that it can be heard over the sound of money falling into the pockets of our elected representatives.
It's a dirty way to play the game. But right now, the game is dirty all by itself.
Bob Veres writes and publishes the Inside Information service for financial planners at bobveres.com. For more info about his Business & Wealth Management Forum, set for Oct. 13-15 in Rosemont, Ill., visit signupforconference.com.